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Cash-out Mortgage Refinancing: What You Should Know
By Jonathan Haeber
CMR Columnist
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I've been hearing the piggy bank analogy a lot lately. People refinance their mortgage for a lot of reasons. Only lately has the "piggy bank" reason been a big one. In fact, much of the economic expansion in the past five years has been due to a large amount of cash-out refinancing and HELOCs. What's cash-out refinancing? It's taking a hammer to your piggy bank -- ok, maybe that's a bit harsh -- but you'll see why cash out refinancing is something you should consider carefully before undertaking.
Put quite simply: Cash-out refinancing is taking your current home mortgage and refinancing it for a larger amount than you owe. For example, you may have a 60,000 debt from your original mortgage. You can cash out refinance for 80,000 and pocket the extra 20G! Not only that, but you can write off the extra interest on your taxes. You may even decrease your interest payments if rates are lower than your current home mortgage.
Sounds Tempting, Doesn't It?
It does sound tempting, but you won't find me cash-out refinancing on my piggy bank. Why? For one, it's almost as if you're taking out a 20,000 dollar credit card loan, except you won't be paying this credit card off anytime soon. You'd have to pay it off over 15 or 30 years! Second, someone who has less than 20% equity in a home will have to pay PMI (personal mortgage insurance); this is essentially giving away money to the banks.
Still, cash-out refinancing may be a good option if you're wallowing in debt. It's good for someone who wants to get out of under the water by using the equity in their home. Just beware of the temptation. Don't crack your home open without careful thought.
Source
Bankrate: How Cash-Out Refinancing Works
About the Author
Jonathan Haeber is a marketing writer for Discovery Channel Stores. He recently purchased his first home, and took a self-taught crash course in home mortgages.
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